Morningstar
Video

What to Make of the Recession Talk

Why a downturn's not a foregone conclusion, and what that means for investors today, with Morningstar Canada's head of investment management, Michael Keaveney.

Michael Keaveney 8 June, 2022 | 4:28AM
Facebook Twitter LinkedIn
Font-Size

 

 

Michael Keaveney: A common definition of a recession is two consecutive quarters of negative GDP growth, with some observers using a broader definition of a pronounced, persistent and pervasive decline in overall economic activity based largely on GDP and the job market.

Whatever the definition, global talk of a recession has been on the rise, with many investment firms, economists and other pundits recently weighing in. Google searches for the term recession are trending strongly upwards through mid-May. Canada has experienced five or six recessions of varied impact and duration since 1970 depending on the definition. So, they are relatively rare but not unprecedented and should be an expected part of an investing lifetime.

Successive rate hikes from the Bank of Canada to rein in inflation and excess demand have ignited some natural concern as many, but not all, rate tightening cycles have resulted in recessions in the past. GDP growth has also slowed with measures of first-quarter growth in Canada coming in below previous rates and below consensus expectations. And domestic investors can't just focus their attention on local activity. We're integrated into the global economy. So, global supply chain issues, elevated commodity prices and the uncertain continued path of a global pandemic factor into the equation.

All told, it's reasonable to think that there is an elevated probability of an upcoming recession in Canada compared to normal, but it isn't a foregone conclusion or even the base case. Beyond the specific probability of whether a recession occurs, there is also uncertainty around the ultimate depth and length of such a downturn. Not to mention the timing of the initial onset. There are a lot of moving parts to this type of prediction, and we are not convinced that most people, including professionals, can consistently get it right.

Recession predictions are unsettling and can evoke anxiety about more than just investments. But investors would be wise to remember a few things. First, before making important investment decisions, it's always prudent to remind yourself of the goals of your portfolio, which may be incompatible with big changes driven by short-term considerations. Next, remember that the link between economic activity and stock market performance is often tenuous. Companies and industries have different patterns of performance, and some can be more resilient to or can even benefit from, economic malaise.

On a related note, valuations matter. Investors will continue to look beyond the current economic cycle and determine if the price they are paying to buy into or hold on to a company is attractive over the long term. Also, forecasts about economic activity are never certain, and there is always a wide margin for error. There is no current consensus on whether there will actually be a recession, even among experts. Like many other things, negative predictions likely take on more prominence in our minds than positive or neutral predictions. We are wired that way, and the media generally obliges.

In that vein, we encourage investors to build their long-term portfolios to be robust to a variety of scenarios, of which a recession is only one. In our view, the inherent uncertainty of markets makes it prudent to build portfolios for a variety of potential paths. Positioning all your assets for a single scenario, such as an upcoming recession, isn't a great idea.

For Morningstar Investment Management, I'm Michael Keaveney.

TAGS
Facebook Twitter LinkedIn
Font-Size

About Author

Michael Keaveney

Michael Keaveney  Michael Keaveney, CFA, is Director, Investment Management at Morningstar Associates, Inc.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility

The Morningstar Star Rating for Stocks is assigned based on an analyst's estimate of a stocks fair value. It is projection/opinion and not a statement of fact. Morningstar assigns star ratings based on an analyst’s estimate of a stock's fair value. Four components drive the Star Rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process culminates in a single-point star rating that is updated daily. A 5-star represents a belief that the stock is a good value at its current price; a 1-star stock isn't. If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Morningstar Star Rating for Stocks, please visit here

Quantitative Fair Value Estimate represents Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. The Quantitative Fair Value Estimate is based on a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies which includes a financial forecast of the company. The Quantitative Fair Value Estimate is calculated daily. It is a projection/opinion and not a statement of fact. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Quantiative Fair Value Estimate, please visit here

The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale of Gold, Silver, Bronze, Neutral, and Negative. The Medalist Ratings indicate which investments Morningstar believes are likely to outperform a relevant index or peer group average on a risk-adjusted basis over time. Investment products are evaluated on three key pillars (People, Parent, and Process) which, when coupled with a fee assessment, forms the basis for Morningstar’s conviction in those products’ investment merits and determines the Medalist Rating they’re assigned. Pillar ratings take the form of Low, Below Average, Average, Above Average, and High. Pillars may be evaluated via an analyst’s qualitative assessment (either directly to a vehicle the analyst covers or indirectly when the pillar ratings of a covered vehicle are mapped to a related uncovered vehicle) or using algorithmic techniques. Vehicles are sorted by their expected performance into rating groups defined by their Morningstar Category and their active or passive status. When analysts directly cover a vehicle, they assign the three pillar ratings based on their qualitative assessment, subject to the oversight of the Analyst Rating Committee, and monitor and reevaluate them at least every 14 months. When the vehicles are covered either indirectly by analysts or by algorithm, the ratings are assigned monthly. For more detailed information about these ratings, including their methodology, please go to here

The Morningstar Medalist Ratings are not statements of fact, nor are they credit or risk ratings. The Morningstar Medalist Rating (i) should not be used as the sole basis in evaluating an investment product, (ii) involves unknown risks and uncertainties which may cause expectations not to occur or to differ significantly from what was expected, (iii) are not guaranteed to be based on complete or accurate assumptions or models when determined algorithmically, (iv) involve the risk that the return target will not be met due to such things as unforeseen changes in changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, tax rates, exchange rate changes, and/or changes in political and social conditions, and (v) should not be considered an offer or solicitation to buy or sell the investment product. A change in the fundamental factors underlying the Morningstar Medalist Rating can mean that the rating is subsequently no longer accurate.

For information on the historical Morningstar Medalist Rating for any managed investment Morningstar covers, please contact your local Morningstar office.

For more detailed information about conflicts of interest, including EU MAR disclosures, please see the “Morningstar Medalist Rating Analyst Conflict of Interest & Other Disclosures for EMEA”here

Select Your Site Edition To make sure the site is relevant to you, we need to know if you’re an individual investor or a financial professional.